Retail banking is one of the few sectors that can benefit when interest rates rise. So, with the Bank of England having raised its base rate on two occasions already this year, how have bank shares been performing?
[top_pitch]
Why can bank shares benefit from interest rate rises?
Whenever the Bank of England raises its base rate, the stock market typically stumbles. The bank’s most recent decision to increase rates was made on Thursday last week.
Rate rises are usually bad news for share prices as, by definition, higher interest rates increases the cost of borrowing. This can have a negative impact on businesses with debt.
Similarly, higher interest rates can add to economic certainly, which can make organisations reluctant to make long-term decisions. Again, this can harm share prices.
Higher interest rates also harm consumers. That’s because when rates rise, it can encourage cautious spending behaviour. This is another factor that can harm share prices, especially for ‘business to consumer’ organisations.
For the financial sector, including banks, higher interest rates may actually boost share prices. That’s because higher rates can make financial products more profitable.
For example, a higher base rate allows banks to hike mortgage rates. And while banks do come under pressure to raise savings rates at the same time, they rarely do. As a result, higher interest rates give banks a golden opportunity to boost profits.
[middle_pitch]
How are bank shares performing this year?
To understand how individual banks are performing this year, let’s take a look at how the values of six FTSE 100-listed banks have changed since the markets opened on 4 January this year.
Bank
Share price on 4 Jan (GBX)
Share price on 21 Mar (GBX)
% change
Barclays plc
196.66
169.70
-13.7%
HSBC Holdings plc
471.50
500.80
6.21%
Lloyds Banking Group plc
49.91
48.75
-2.32%
Royal Bank of Scotland Group plc
234.90
214.90
-8.51%
Standard Chartered plc
462.80
508.60
9.9%
Mixed fortunes
As the table above shows, despite two base rate rises already this year, 2022 has so far delivered mixed fortunes for big-name banks.
Holders of Standard Chartered shares will no doubt be the happiest. Its share price is almost 10% higher than it was at the start of the year. Despite being headquartered in London, the banking group doesn’t have any branches in the UK. Instead, it mainly focuses on Asian markets.
Another strong performer this year has been HSBC holdings, with its shares up over 6%. The banking giant had a steady, if not marvellous, 2021, and it seems as though it has continued this performance during the first three months of 2022.
In stark contrast, Barclays has struggled in 2022 so far. Its shares are almost 14% lower than they were in January. Barclays shareholders will no doubt be hoping the bank will bounce back to repeat its performance of 2021. Last year, Barclays was a hot pick among investors due to its shares soaring by 28%.
Another big faller so far in 2022 is Royal Bank of Scotland. Like Barclays, RBS shares skyrocketed in 2021, climbing by almost 35%. However, it remains to be seen whether the bank can shake off its sluggish start to the current year.
Are bank shares a good buy?
As we’ve seen, despite interest rate rises often being welcomed by the banking sector, there’s no guarantee that hikes will correlate with higher share prices of companies within the sphere.
So, if you are interested in adding banking stocks to your portfolio, it’s best to do this as part of a diverse investing strategy.
It’s also a good idea not to hold any expectations of share prices rising in future simply as a result of decisions made by the Bank of England. Remember, markets already expect further base rate rises this year, so this will already be priced into current share values.
Are you looking to invest? If you’re looking to buy individual stocks, then you’ll first need to find an investing platform. To compare options, take a look at The Motley Fool’s top-rated share dealing accounts.
The post Mixed fortunes: how individual bank shares have performed so far this year appeared first on The Motley Fool UK.
Is this little-known company the next ‘Monster’ IPO?
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Click here to see how you can get a copy of this report for yourself today
More reading
Share trading? These 10 UK stocks have risen by the most in the last year
UK investors were buying these top shares during last week’s market bounce
The State Pension will rise by less than inflation — that’s why I’m investing in UK shares
Credit card rewards top £70 billion in 2022! Are you missing out?
Spring Statement 2022: 4 stocks that could rise
